Andrew McGuire | October 10, 2018 | News
As our theme for this month is Halloween, I thought that I could impart some of the more drastic errors or surprises that I have seen business go through, with the aim to hopefully have you all read this and NOT make the same mistakes.
Let’s start off with some simple errors to avoid when first using Xero Accounting software, these are the things that we as qualified bookkeepers fix time and time again, they can be costly to the business in both time and GST under claims.
The business has setup a new Xero file and sent off the form to have the bank feeds connected. The Xero user will then happily code the bank feeds as they appear, assuming all of their work is done, happy days! And make ATO lodgements with the data they have entered. Six months later they decide to get some help with Xero. We then find that the Xero bank balance does not match the actual internet banking balance (a core correct source that you balance to) by thousands of dollars as there is a gap in the data for the period of time that the new business was being setup. We find new assets were purchased and correct huge GST under claims.
a) Understand that bank feeds only start from the day the connection is made, you will need to manually download transactions from your internet banking and import them into Xero for the (at least 10 day) period before the feeds start.
b) You should regularly click on the ‘Reconciliation Report’ words at the top right of the bank reconciliation screen, check that there are no unreconciled entries and that the closing balance matches to your internet banking balance.
Clients has coded wages type bank feed lines to a ‘Wages Expense’ account. This becomes a duplicate wages expense entry.
Understand that Xero posts to the wages and superannuation expense accounts when you process a pay run. You should code wages type bank feed lines to the Wages clearing account, generally called ‘804 – Wages Payable – Payroll’.
The owner has paid a bonus of say $300 to a staff member (topical as Xmas is coming up soon!). When the bank feed comes up the bank feed line is coded to ‘Wages Expense’. Xero Payroll has not been used at all for this bonus.
Understand that the bonus will need to be processed through Xero payroll so that the bonus can be reported as income to the staff member by the end of the year. When the wages bonus line appears on the bank feed it should be coded to ‘804 – Wages Payable – Payroll’.
- I hope the tips above help you with your Xero file. Here are some more common errors that I have seen in regards to accounting soft wares in general.1) New Chart of Account
Client sets up a new chart of accounts in the accounts list. The tax code on the new account is not checked or setup, tax code defaults to BAS Excluded. Next the client purchases a new asset and again omits to check the tax code on recording the transaction. If the asset purchased was for $55,000 then this would be a $5,000 GST under claim.2) Merchant Fees
Basic bank services are ruled to have NO GST applicable. Additional services such as Merchant facilities and internet banking fees DO have GST included. The problem is that these amounts are taken directly from the bank so we often don’t see a document and don’t think to ask if there is GST included. I have happened across this error many times while working on a client file for some other reason. Generally the back claims are quite sizeable for example – Retail business using a card terminal for most of their sales. Merchant Fees on the bank statement of approx. $770 per month. Luckily we can make a back claim adjustment for up to four years on the current BAS for most of these types of corrections, this example would be a four year back claim of GST $3,360. Money much better used in your business than the ATO.
One last scary situation that has to do with changing from a Sole Trader or a Partnership to a Company, this is a common progression for a growing business but if not dealt with correctly can least the new business very cash poor down the track in regards to Company Tax.
New Company has been setup for the client, they moved from a partnership to a company on say 1st July 2017. The company makes good profit for the first 12 months of trading for the year July 17 to June 18. The business had already been trading as a partnership so there is momentum there and the profits continue to be stable. The entity keeps trading July 18 to June 19, making even more profits this year and not putting any cash away as no one has discussed the possibility of company tax with them.
The accountant is running late and gets the tax return for 2018 lodged just in time for 31 May 19 lodgement deadline (almost two years after the move to a company).
Immediately the relatively new company is asked to pay $150,000 upfront for the 2018 income tax – Due on 31st May 2019
In addition to the tax for the 2018 year, the ATO has now added the 2018 tax return details into the system and a company tax instalment of $40,000 appears on the next BAS. The owners are told that they will have to come up with an additional $40,000 each 3 months now with every future BAS lodgement.
The ATO does not register that the entity will owe company tax until the first income tax return is lodged, so no tax is paid for a new company for the first 23 months of trading. Once the first tax return is lodged, the ATO then has an understanding of the new entity and asks them to pay their company tax that is due PLUS pay upfront for future years each quarter.
If you move from a Sole Trader or Partnership, estimate 1/3 of your profits and put this away each month or quarter, into a savings account so that you have that cash ready for when the ATO asks for it. Never fear, that day will come!
I really hope that these weren’t too scary for you and that my tips have helped you.
Have a great October and Halloween.
Until next month,